- the reduction in the dividend allowance from £5,000 to £2,000 from April 2018; and
- the increase in the rate of Class 4 National Insurance contributions (NIC) in April 2018 and April 2019.
- the basic rate of income tax shall not exceed 20%;
- the higher rate of income tax shall not exceed 40%;
- the additional rate of income tax shall not exceed 45%;
- the standard rate of VAT shall not exceed 20%;
- the reduced rate of VAT shall not exceed 5%;
- no supplies may be removed from the lists qualifying for the reduced rate of VAT or the zero rate of VAT;
- the rate of Class 1, Class 1A, and Class 1B NIC paid by employees, employers, and third parties shall not be increased; and
- the NIC upper earnings limit shall not exceed the higher rate threshold for income tax.
Profit |
2017/18 |
2018/19 |
||||
Sole trader net after tax |
Company owner net after tax |
Saving |
Sole trader net after tax |
Company owner net after tax |
Saving |
|
£ 20,000 |
£ 17,087 |
£ 17,657 |
£ 570 |
£ 17,235 |
£ 17,432 |
£ 197 |
£ 25,000 |
£ 20,637 |
£ 21,404 |
£ 767 |
£ 20,785 |
£ 21,179 |
£ 394 |
£ 30,000 |
£ 24,187 |
£ 25,150 |
£ 963 |
£ 24,335 |
£ 24,925 |
£ 590 |
£ 35,000 |
£ 27,737 |
£ 28,896 |
£ 1,159 |
£ 27,885 |
£ 28,671 |
£ 786 |
£ 40,000 |
£ 31,287 |
£ 32,642 |
£ 1,355 |
£ 31,435 |
£ 32,417 |
£ 982 |
£ 45,000 |
£ 34,837 |
£ 36,389 |
£ 1,552 |
£ 34,985 |
£ 36,164 |
£ 1,179 |
£ 50,000 |
£ 37,737 |
£ 40,135 |
£ 2,398 |
£ 37,885 |
£ 39,910 |
£ 2,025 |
£ 60,000 |
£ 43,537 |
£ 46,340 |
£ 2,803 |
£ 43,685 |
£ 46,115 |
£ 2,430 |
£ 70,000 |
£ 49,337 |
£ 51,807 |
£ 2,470 |
£ 49,485 |
£ 51,582 |
£ 2,097 |
£ 80,000 |
£ 55,137 |
£ 57,275 |
£ 2,138 |
£ 55,285 |
£ 57,050 |
£ 1,765 |
£ 90,000 |
£ 60,937 |
£ 62,742 |
£ 1,805 |
£ 61,085 |
£ 62,517 |
£ 1,432 |
£ 100,000 |
£ 66,737 |
£ 68,210 |
£ 1,473 |
£ 66,885 |
£ 67,985 |
£ 1,100 |
The costs and benefits of incorporation
Where there is an existing business, there will inevitably be tax costs associated with incorporation, such as capital gains tax (CGT) and stamp duty land tax (SDLT) (or land and buildings transaction tax in Scotland) on the transfer of assets. Reliefs may be available to mitigate or defer any CGT, but there is no incorporation relief for SDLT.
A company is, of course, a separate legal person and provides limited liability. That said, in an owner-manager situation, protection may be reduced if monies are lent or guarantees given. Operating via a company may open doors for attracting new business, as it gives the impression of a business of a certain size.
There are, of course, increased administrative costs associated with running a company. These include operating a payroll and the associated real time information reporting to HMRC, filing accounts and annual returns at Companies House, and online corporation tax filing with HMRC. The decision to pay dividends should also be properly recorded and the correct paperwork completed.
Companies won’t be within the quarterly reporting cycle for making tax digital for business until April 2020 (compared to April 2018 or April 2019 for the self-employed), although if VAT registered, they will start using HMRC’s new digital services for the quarterly reporting of VAT from April 2019. Therefore, any benefit of delaying quarterly reporting to HMRC by incorporating a business will be minimal.
It should be remembered that for many contractors, however, there is no choice but to operate via a company where the engager will only engage a company.
The future
In his spring Budget speech, the Chancellor alluded to the fact that the ‘Taylor Review of Employment Practices in the Modern Economy’ is aware that tax is a key driver in trends between employment, self-employment, and incorporation. While tax and NIC were not within the original scope of the Taylor review, it will be interesting to see what the final report has to say on this matter, and what bearing this might have on future tax policy.
As for other tax changes, Brexit may add some uncertainty to the picture. A further reduction in the corporation tax rate to 17% in April 2020 has already been legislated for in Finance Act 2016. Other manifesto pledges include raising the income tax personal allowance to £12,500 and the higher rate threshold to £50,000.
Practical Tip:
Where there is a choice of business vehicle, the decision should be influenced by all costs and benefits, only one of which should be tax.